74. The evidence presented to the Committee in
the course of this inquiry suggests that the financial services
industry has shown significant failings in the endowment mortgages
story.

There were failings in the
way the product was sold.

The way assets were managed
did not generate the level of returns for investors which might
reasonably have been expected.

The industry failed to inform customers about
what was happening to their savings as investment returns tumbled
and failed to give them adequate advice on what to do about the
problem.

There were inadequacies in the way the issue
of policyholder compensation was addressed, after the industry's
other failings had been exposed.

75. Our inquiry has also identified a range of
issues which the FSA has had to address and which it needs to
continue to address. However, as the table at paragraph 7 above
indicates, the vast majority of endowment mortgage mis-selling
occurred before the FSA came into being.

It has to ensure that measures
are in hand to identify those affected by shortfalls. This has
included requiring companies to send red, amber, green letters
from companies to their customers indicating the extent to which
their mortgages would not be covered, as an essential start to
addressing the situation. The assessment by individual companies
of the number of red and amber letters they need to send out provides
as good an estimate of the scale of the number of policies subject
to shortfall as is likely to be available. The figures will need
to be monitored regularly by the FSA to see how the problem develops
in coming years. Any alternative survey would not only have to
look at the specifics of hundreds of thousands of cases but would
have to forecast the likely state of equities when particular
policies mature. For both reasons it would involve a wide range
of uncertainty.

It has to oversee the process by which individuals
are advised on what they should do if faced with a shortfall on
their policy. For many, a repayment mortgage may be the appropriate
option but alternative solutions may be available to others. It
is not the FSA's role to give this advice itself, but to ensure
that the companies which sold the products are doing so.

It has to ensure that remedies are provided by
the companies responsible for mis-selling. The time limits that
apply to endowment mortgage complaints have been poorly communicated
to policyholders and require urgent review as growing numbers
of policyholders pass the third anniversary of receiving their
first warning that there was a probable shortfall on their policy.

76. Overall, it is important for the industry,
the regulators and the Government all to recognise the size of
the problem which has arisen. The problem is likely to worsen
as increasing numbers of low-cost endowment mortgage policies
mature in the coming decade. There needs to be a constructive
engagement by the industry with the problem if difficultiesin
some cases serious distressfor a large number of people
are to be avoided.

78. There are some signs of progress. Most in the
industry do now at least accept that things have gone badly wrong
and the reputation of companies has been damaged. The Association
of British Insurers, for example, told us that "the industry
recognises that it has many disappointed customers and the [endowment
mortgages] episode has tarnished its reputation. Wherever insurers
and/or distributors are found to have acted wrongly, policyholders
should be compensated for any loss. More generally, there is a
need to rebuild trust with customers."[164]
Mr Sandler told us that he too detected the first "glimmers
of hope that the industry is beginning to acknowledge that it
has a reputational problem and is now taking steps to rectify
that"[165] but
that, like the Committee, he believed there was still a long way
to go. In particular, it is far from clear to the Committee that
the basic business model that has historically dominated the industry,
a focus on commission driven sales rather than longer-term product
performance, has changed in a way that will encourage the industry
to behave more responsibly toward the consumer in the future.
The picture that emerges from our inquiry into endowment mortgages
is one of a long-term savings industry wedded to an inappropriate
sales and commission led business model which is damaging the
reputation of the industry and undermining consumer confidence
in long-term savings. In this context, the current regulatory
framework is left struggling to tackle the symptoms of that inappropriate
business model.

79. Improving the business model and culture that
currently dominates the long-term savings industry would deliver
benefits that extend well beyond restoring domestic consumer confidence
in the UK's savings institutions. Such reforms should deliver
world class financial institutions and confirm the UK as a venue
of choice for both savers and fund mangers, but Mr Myners warned
the Committee that this would only happen "if we are able
to show the world that the UK sets best standards in terms of
sales process, commissions, charges, reasonableness, equity between
the product provider and the customer, full and open disclosure
[and] the absence of kick-backs."[166]
Many of our witnesses have argued the case for fundamental
reform of the way the long-term savings industry conducts its
business. Such reform would not just serve to restore domestic
consumer confidence, it would deliver world class financial institutions
and help the UK claim the position of international venue of choice
for savers and fund managers alike.

80. It is important to align the interest of the
consumer and the industry more closely. One of the most striking
features to emerge from the evidence we have heard on endowment
mortgages is that the industry can sell a financial product which,
in 80% of cases, fails to meet its clear target in terms of returns.
Yet the industry suffers no direct financial loss itself from
the endowment shortfalls and can charge the same fees whether
the product delivers a satisfactory return or not. This inevitably
raises questions about the industry's fees structure. Retail financial
services companies have traditionally charged a simple percentage
of the funds invested, plus any commission payable. It is notable
that the debate surrounding the appropriate charging regime for
Sandler products has concentrated on a similar fee structure,
based on a percentage of the funds invested, to that underpinning
most endowment products. Whatever level the price cap on Sandler
products is set at, the fee structure proposed will simply continue
to bias the industry towards the aggressive pursuit of sales,
since that is what it will be rewarded for. It would be preferable
for the fee structure in the long-term savings industry to reward
the delivery of superior investment returns and the provision
by the industry of the sort of after-sales care for the saver
that was spectacularly missing in the case of endowment mortgages.

81. Mr Sandler identified what the Committee believes
is the core of the problem, when he told us that "the industryand
I am thinking of the life companies in particularhave clearly
defined obligations to their shareholders. Their obligations in
terms of duties of care to policyholders are much less well defined,
and I think, historically, the industry has operated much more
on the basis of how do I secure distribution rather than how do
I ensure that my customers are being best served."[167]
This view was endorsed by Mr Myners[168]
and several other expert witnesses. Urgent action is needed
from the Government, the FSA and the industry to alter a culture
that has led to the multiple failures seen in the case of endowment
mortgages. Central to delivering the needed cultural change is
a shift from the current fee structure that rewards an often inappropriate
sales process. It is disappointing that a similar fee structure
has dominated the industry's thinking on the proposed Sandler
suite of products. The challenge, for both the industry and Government,
is to develop a fee structure for long-terms savings products
that reinforces the industry's duty of care to the saver by directly
rewarding good investment returns and client retention rather
than simply paying out high rewards for client acquisition.